Q3 2019 Earnings Call
Welcome to the Treehouse Foods third quarter 2019 conference call. This call is being recorded.
Hi, I will turn the call over to Treehouse foods for the reading of the Safe Harbor statement.
Good morning, Thanks for joining us today before we get started I'd like to point out that we posted the accompanying slides oracle today on our website at Treehouse Foods Dot com.
This conference call may contain forward looking statements within the meaning the private Securities Litigation Reform Act 1995.
Forward looking statements include all statements that do not relate solely to historical or current back and can generally be identified by the use of words such as guidance may should could expect seeks to anticipates plans beliefs estimates approximately nearly intense predicts <unk>.
Our next potential promises were continue or the negative such terms and other comparable terminology.
MCCSR only production.
The outcome of the events describing these forward looking statements is subject to known and unknown risks.
Certain cheese and other factors that may cause the company or its industries actual results levels of activity performance or achievements to be materially different from any future results levels of activity performance or achievements expressed or implied by these forward looking statements.
We held for Form 10-K for the period ending December 31st 2018, and other filings with the FCC discuss some of the risk factors that could contribute to these differences.
You are cautioned not to unduly rely on such forward looking statements, which speak only as of the date made when evaluating the information presented during this conference call.
The company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward looking statements contained herein to reflect any change in expectations with regard there too or any other changes in events conditions or circumstances on which any statement is based upon.
For purposes of our discussion today, beginning this third quarter, both sac and ready to eat cereal business as qualified for discontinued operations treatment.
As such our results and outlook today Im going forward will be discussed on a continuing operations basis. We filed an 8-K on October 20 seconds to provide quarterly historical information for 2018 and 2019 on that same basis.
I'd now like to turn the call over to our CEO and President Mr. Steve.
Thank you PR good morning, everyone and thank you for joining us today to discuss our third quarter results our year to date progress on a continuing operations basis in our guidance for the remainder of the year.
Hopefully, you've all seen or to cross releases this morning.
First our third quarter earnings and second the CFO transition.
Let me start with Matthews departure I'd like to first thank him.
For his support of me and the company over the past three years.
Matthew it's been a valued business partner since I joined the company 18 months ago.
He deserves a great deal of credit for helping drive the organization for.
He has served us well and we thank him for his many contributions to treehouse, including the great Finance and accounting team we have built over the last three years.
As I look at the Treehouse organization, we are building today.
And our strategic direction.
We are at an inflection point.
Today, we are more focused and more growth oriented.
I believe that we will be best served my leadership team the reflects that new profile.
Two great examples of this pivot our our new Chief strategy Officer.
And our newly created position of Chief commercial officer.
To put it another way, having a growth orientation is key to our future.
I'm pleased that math, you will be engaged as a consultant over the next three months as we work through the transition and that he is available as needed.
Bill Kelly, our senior Vice President corporate and operations Finance will become our interim Chief Financial Officer.
Bill has been leading the finance transformation work here or Treehouse, and that's been responsible for the Companys financial plans.
Bill This is a highly regarded finance and food industry veteran.
Being spent most of this 30 year career with a number of branded food and beverage industry peer companies like Pepsi Hillshire brands and craft funds.
We have a deep and talented bench your treehouse and I'm confident in builds a buildings and the team's commitment to a smooth transition.
We are initiating a search for a permanent CFO .
And we will be considering both external and internal candidates, including bill.
Commit to finding the right leader with a growth oriented.
CPG background to help drive for business and position ourselves for the future.
Before we get into the details the third quarter I wanted to make sure we take a step back and frame our year to date progress.
At our Investor day, less than a year ago, we outlined a strategic agenda.
To become a smaller leaner higher margin and less Levered organization.
Become customer centric and to strengthen our capabilities around commercial excellence.
We'll increase our focus on the growth in the back half this year.
And to return Treehouse to growth in 2020 and over the next three years.
Our recent 8-K filings gives you a much clearer picture of the progress.
On slide three on a nine month basis, you can see that adjusted EPS from continuing operations is up 32%.
On revenue declined 7%.
I think that demonstrates that we have in fact accomplished a great deal and then we're making excellent progress against our strategic agenda.
Now that's not to say that were content with our performance in the third quarter.
Adjusted EPS of 55 cents was two cents short of our midpoint of our guidance.
And the prior year.
Although this was still within the guidance range. It was below all of our expectations on an operating basis.
A couple of things worked against us in the quarter.
First although volumes tracked reasonably well in July and August we had a rather material and unexpected reduction.
In September orders.
Second in the quarter, we took several significant actions to capture long term operating efficiencies and to align our manufacturing cost profile.
These actions created short term disruption and resulted in higher than anticipated manufacturing variances in our plans.
And therefore lowered gross margins for the quarter.
It's important to recognize that this realignment work around operational excellence puts our plants in a much stronger position then when we started 2019.
We believe.
The issues are transitory.
And that these changes to our workforce and shift schedules will translate into sustained future performance.
Correct.
In my most recent plant visits we have examples of plants that are making remarkable progress.
The lower than anticipated margins in the third quarter were offset in part by continued SGN, a discipline and the benefits of tax plan.
Before I hand, it over to bill to dive into the numbers in the guidance. Let me also give you an update on commercial excellence.
I'm very pleased that we continue to deliver service levels above the 98% target.
And remain encouraged as I see how great customer service has become a way of doing business throughout the Treehouse organization.
As I shared with you on the last call we launched the commercial excellence organization in July .
In comparison to the past our commercial teams are much much better aligned with a customer instead of a line by category.
From a geography standpoint, our commercial teams are now closer to the customers naturally, allowing for more frequent engagement and more focused selling efforts.
As we continue to strengthen our commercial organization, we're regaining the confidence of our customers.
In a large part because we have been able to sustain our service levels, but also because our reorganization is delivering very tangible benefits to the customer.
We were points of accountability more face to face meetings, and a greater understanding of the customer's needs and how treehouse can deliver against them.
The customer feedback we've been receiving has been overwhelmingly positive.
We now have customers, who are asking us to requote business that we have lost within the last 24 months as they recognize.
The inefficiency of dealing with some of our smaller competitors.
It's important to remember however that the landscape remains hot remains highly competitive and that winning back business will take some time.
We are well into our budget and planning process for 2020.
I talked a bit but the last investor conference about our efforts to create a more integrated business planning process.
The commercial organization is now building their planning expertise the detailed highly customer centric operating plan to simply did not exist before.
That plan is being tightly linked.
Both our category strategy and our revenue management team.
I'm optimistic about what treehouse can deliver as we get these things in lockstep.
Integrated business planning process common in our large food company peers will give us a clear line of sight to growth and help us better define specific customer opportunities.
Bill has been instrumental as we've kicked off the IBP process.
And he in conjunction with our Chief operations Officer will continue to lead the effort.
Importantly, IBP will also help give us an early read on changing demand signals. So that we can more smoothly adjust our operating patterns without some of the step function reaction that negatively impacted our results in the third quarter.
Finally, I'm encouraged by the solid sequential progress this quarter in volumes as the nearly 10% decline in the first half the year improved to a 5% decline this quarter.
We continue to anticipate that we will deliver sequential improvement in the fourth quarter, where we believe a pivot to slight volume growth is reflected in the midpoint of our guidance.
Let me now I'll turn it over to Bill to give you more detail around the quarter and update you on our outlook for the balance of the year before we open the call up to Q on that.
Bill.
Thank you Stephen good morning, everyone.
I've had the pleasure meeting solidly in the past I look forward to work with all of you in the future.
Our third quarter is the first quarter, we've reported on a continuing operations basis, giving a go look at core Treehouse now that snacks and the cereal businesses have been presented as discontinued operations.
Recall that the first and second quarters. This year, we did our best to showcase our progress around portfolio optimization, but that progress truly became apparent when we filed the prior six quarters on a continue operations basis and the AK a few weeks ago.
Let's now turn to our results for the third quarter versus our guidance.
As seen on slide five revenue of 1.6 billion was inline with our guidance range, while interest was slightly higher and the lower tax rate as result of our pay efforts help us to deliver the 55 cents diluted EPS from continuing ops.
Also within the range of our guidance.
Slide six gives you a clean look at the financial performance of the company and I can tell you operations basis.
[noise] I'll go into more detail in a minute around the drivers of the division the margin erosion year over year, which has impacted by the operating variances mentioned earlier.
EBIT margin from continuing operations expanded 10 basis points versus the prior year.
Thats continue as sinead discipline, partially offset the division deal I Miss.
Additionally, we had noncash impairment charges, a third quarter totaling $88 million to write down the ppm E and intangibles for center of the store package cookies and dry dinners.
As a part of our number of wine business reviews, we determined that the current and projected cash flows resulted in a current fair value of these businesses below the accounting values ascribed to them at the time of their acquisition.
Hence the write down.
This makes up the majority of the items impacting comparability for the quarter.
On slide seven you can see that excluding SKU rationalization, which impacted the topline by less than one point this quarter.
Total organic volume declined 4.7%.
The volume declines and baked goods that mill solutions are beginning to moderate while beverages is showing growth a trend we expect to continue in the fourth quarter.
Turning to slide eight division to rely which was down $17 million year over year or 25 cents, an EPS was partially offset by strong as sinead discipline and tax planning actions.
Slide nine gives you color around the drivers other division deal I decline.
Volume and mix was off about $11 million versus last year.
As Steve noted I revenue track reasonably well in the month of July and August , but we saw material and unexpected decline in orders in the last month of the quarter.
Pricing to recover inflation that of commodities spraying warehousing contributed $11 million year over year, while the $21 million negative in operations is in large part being driven by the reduction our second half volume as Steve mentioned earlier.
The good news is our efforts around Tms and lane are working and we've been able to buy more effectively and take out significant costs.
All of this change however resulted in short term transition expense at a number of plants.
Higher material usage variances and higher ways.
We have several mitigating actions already underway to further strengthen the business.
The one we've launched a war on waste program.
This competition across the entirety of our plant network, which includes measure scorecards monthly status reports and the plants competing against each other for the greatest improvement.
Moralistic leave our integrated business planning process is gaining momentum.
Steve talked about how innovative planning will more tightly knit together the commercial organization with strategic category planning at revenue management.
Our operations team will also benefit for more efficient labor planning.
Lager production runs and waste elimination.
IBP is a tried and true food industry process and standard and having personal experience. This experience that other organizations I'm optimistic about how we can better connect treehouse.
During the early stages of implementation, but we expect entire accompanied again a great deal from it.
Wrapping up slide nine then.
S.J. disappointed the division level contributed $4 million year over year.
On slide 10, we began broken out the deal I drivers by Division as you guys see the majority of the operational challenges where in beverages and mill solutions.
Slide 11 takes you through our net debt profile in working capital.
As a reminder, our third quarter tends to be working capital intensive intensive as we build inventories ahead of our seasonal fourth quarter sales peak.
That said, we finished the quarter with more inventory on hand the plan.
This is really due to three factors.
First if you remember earlier this year, we built inventory ahead of the potential flooding in the Midwest, what's ended up being more precautionary and we're still working through a bit of that.
Second we continue to build inventory in advance of the in Ellida labeling that line.
And third the lower than forecasted volumes in Q3 resulted in higher than planned inventory.
We still believe that we will meet our year on working capital goals as we have put clear and targeted inventory drawdown plans in place for the balance of the year.
Slide 12 provides you with a summary of our updated 2019 guidance.
We are tightening and lowering the bottom end of our revenue guidance range to 4.26 billion to 4.36 billion.
And our adjusted EPS from continuing operations to $2 $32 50 per share.
Revise guidance incorporates a slightly lower tax rate.
$5 million lower Capex, but maintains our free cash flow guidance of 160 million 290 million.
With regard to the topline a rebound following the client in September orders did not materialize in October .
The later Thanksgiving day holiday May impart the reason why customer orders were light, but we think it's prudent to reduce the midpoint of our topline expectations by $80 million.
From an operational perspective, we believe the issues of Q3 are largely behind us. Although we have assumed the operational variances of the third quarter do have some impact on Q4 as inventory on hand, epicel reflect some of this cost penalty.
On slide 13, we've given you the guidance elements for Q4 that gets us at 13% EPS growth at the midpoint.
Volume growth in the beverages Division continued SJ disciplined and a favorable tax rate.
Our expected to be partially offset by manufacturing variances and the continued drag of volume loss primarily in baked goods.
We mentioned this earlier, but what you see our fyfourteen as our year to date progress posting a very respectable 32% growth in adjusted EPS from continuing ops.
As you can see the improvement we need to making Q4 is from our point of view and achievable number.
At the midpoint Q4 is expected to go up 13% and the full year, 22%.
Although the third quarter did not turn out exactly as we anticipate it we think our year over year progress as clear.
You've seen slide 15, before but we continue to expect sequential improvement to continue in the fourth quarter way pivot to slight growth as reflected in the midpoint of our guidance.
Slide 16, reaffirms, our free cash flow target for the year of 160 190 million.
And our priority for cash continues to be debt repayment.
We continue to wait for the Greenlight from the FTC the close rate each cereal transaction, so assuming that closes before the end of the year, we expect to pay down about $400 million in debt and finished 2019 with our bank covenant the fine leverage ratio between 3.6 times to 3.8 times well below.
Our covenant requirements.
Slide 17, reaffirms our expectations for growth for 2019.
Thats, one or 2% growth on the topline.
Equal to or greater than 10% EPS growth.
And approximately $300 million and free cash flow.
With that let me turn it back over to Steve to wrap up and open the call to QNX.
Thank you Bill in closing I'd like to leave it with a couple of key thoughts.
It's important to recognize that we've made incredible progress this year.
It's been a year of significant structural improvement around our strategic pillars of operational excellence commercial excellence portfolio optimization and people in talent.
As I've said before we're on a journey here.
As we prepare to finish 2019, we are in a dramatically better position to grow the company in 2020 and beyond.
Growth in private label takes time for the combination of our improved service levels and the launch of our commercial team give me confidence that we will unlock the our potential for growth and deliver increased shareholder value.
I continue to be very proud of what we've accomplished in such a short period of time and where we're headed.
I want to thank the entire organization, they're ongoing commitment to our customers and to our values.
At this time Bill are available to take your questions.
Given the recency the management transition, but also ASP to join us for Q and eight today.
Operator, please open the call for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using you speakerphone. Please pick up your handset for pressing the keys to withdraw your question. Please press Star then to at this time, we will pause momentarily to assemble our roster.
Okay.
And the first question today comes from Chris Farley of Stifel. Please go ahead.
Hi, good morning, 40, gross or not it.
I wanted to ask if I could first so just to be clear you did not get any recovery in shipments in October and I guess I'm, just trying to get your sense or on your confidence around the fourth quarter outlook.
And given that delay in shipments did you build in some shipments later in the quarter. It is trying to get a sense of how you expect that's kind of the flow through volume in the fourth quarter, given your expectations for to be better in Q4 versus Q3.
Sure sure high gross.
I think we just plan October to be a normal October and that's how it's that's flushing out to be so.
We didnt see that bounce back from the things that fell out of September but October shipments are pacing right, where we haven't planned.
And we don't need a spectacular recovery anytime in the quarter to meet the numbers, we've guided to we need a good solid two months. After this morning Gotcha.
And just one other question.
Well one of the bar charts that showed that negative $21 million drug apart from the operations.
I guess I'm just trying to you made a comment there was some of the I guess inefficiencies that occurred in the quarter how much of that continues into the fourth quarter or these things all now wrapped up is it just the residual higher cost of inventory that you have to work through sort of get better sense of what to expect there from from that angle. Let me, let me do part of that and I'll ask bill to do part of that so the operating.
The answer is in the quarter were significant but they were really a result of an acceleration I would call to a step change.
In our in our labor and our scheduling practices and those were.
Facilitated it's really a convergence of us better understanding our our demand forecast us being much more disciplined on inventory and then quite frankly lean and tmos, creating capacity. So we took an opportunity to take significant costs out of our our system for the long term.
When you do that you have a lot of variances because people move around and you have bumping training all of these things.
Quite frankly, the volume in the quarter early when we made this decision the volume look pretty good we thought it would cover it.
But I think regardless of that fact.
I think we've positioned the plants much better and it's hard to have negative numbers and talked positively but team also know that sounds a lot t. masinloc unlocked capacity that allowed us to do this so maybe I'll, let bill speak to what's what's carrying into the fourth quarter.
Hi, Chris So in terms of the of the impact the plants have run reasonably well all year I.
I think in Q3, we saw a.
A bit of a hiccup there obviously as you know as we capitalize varying says we'll have some of that roll into Q4, the midpoint of our guidance does account for that so we think we'll be fine in terms of our ability to deliver Q4.
And I guess to be clear than this lower cost base I'd call that because of the capacity. You crew then what you've taken out does that kick in in the fourth quarter. Therefore, so you'll get some residual costs, but when do we start to see those savings that you created as part of this step change. If you will I think that will help us in next year. It helps us get our 10% earnings growth next year and looking at all.
Also helps us for volume on the plants right that an incremental capacity is really going to going to pay off as we start to grow.
Okay. Thanks, what's the time, yes.
Your next question comes from Andrew Lazard of Barclays.
Good morning, everybody.
Hi, good morning tight.
I guess my first question is a bit more general to start.
It does seem that treehouse as making as you mentioned quite a bit of sequential progress run on both sales and profitability.
And you've talked about though some items that came up in the quarter led results me a bit below your expectations.
And I guess, what what I'm doing as if I go back to sort of your comments on the twoq call and sort of throughout the quarter in various sort of venue that it's sort of felt like trios had a good read.
On how you sort of expected the back half to play out I guess more specifically on the sales side.
I think you'd make you'd made mention of retailers don't shift around volume that off in the holiday season, and that gave you some some better visibility things like that.
Just trying to get a sense.
It's not having the the systems in place yet are forecasting accuracy or maybe it's just the nature of to some extent private label inherently going to be more volatile from time to time and we'd have to kind of.
Except that I guess, what to do is I'm asking how all this plays into your level of confidence.
And how investors can think about that as really go into your 2020 outlook.
More than anything else and then I've just got a quick follow yes sure Andrew I would tell you. The you know we've been running the IBP process for a few short months.
Commercial organization is now, bringing us a bottoms up forecast.
If you think about it is not long ago, when I stood up there and talked about 13 different ERP systems, and five different salesforces and all of those different things. So the work we've made over the last year has started to consolidate all of that stuff and I would tell you I think the volume forecast or better than we've ever had I.
I think they'll get better each month, so I have more confidence in him today than I did three months ago, and a lot more covenants and on a month from down in two months from now so I think it's fundamentally getting better I would tell you we had soft shipments in October and I think it was consumer demand or no October skews in September I cant October's tracking fine.
The September numbers caught us off guard quite frankly, and they were customer pull numbers October bounced back to a normal October .
So I wouldn't suggest we won't get caught by surprise occasionally.
But you know I think in my my prior history, we had a couple of those months.
As well so.
I'm not sure the in this business, we control all the levers and we can forecast that down to the every possible month.
But I feel good about next year, what we can talk about is as we start to see customers, bringing us in for bids we weren't in before as we start to see contracts layering on quite frankly, as we lap losses right as our denominator becomes more clear to us which is happening so.
We're we're fortunate not to have a lot of pricing.
That we face in this next year. So the team is really working hard on new business. We're not we're not working with a customer to get pricing through so we're in a very different place than we were the last two years at this moment.
So I would suggest our visibility to 2020 is.
I can't speak to a past my last 18 months with the certainly the best since I've been here.
Great. Thank you for that I mean, just one quick one is maybe the comment was assuming the relative cereal business close by the end of the year on A. I realize it doesnt pay for anybody to sort of trying to handicap, what the government will do around timing and such but should I take from that your thought that that's kind of broadly where your expectations are right now.
That business.
No I think so again, we just we just don't want to.
You know, we don't want to handicap, what they're going to do with the holidays and they are scarce their staffing situation all those things when they'll get through the work. So it's it's hard for us to believe it's taken as long as it has we've tried to be a supportive as possible.
I am on record, saying I think that this transaction creates.
A real competitive force a private label combining our business with most business will create a scale private label competitor.
I think in the end that will show through I, just don't know when the handle the so.
Thank you very much thank you.
Your next question comes from Rob Moskow of Credit Suisse.
Hi, Thank you.
Nothing to worry about hi, hi, good morning, I was hoping to get a little more color around 2020, your your re and forcing your confidence on 10% EPS growth but.
Given the the the weak sales here and in the lack of visibility I think in house sales tend to roll through.
I'd like to know do you need to have sales positive in order to get 10% EPS growth next year.
Or is it really the overhead cost reductions that give you the confidence that you can get there and then secondly, I know theres no discussions about price increases, but some of these costs have come down transportation looks like it's coming down is there any risk that your customers might want.
Credits for that and ask you to lower prices.
In 2020 thanks.
Let me, let me touch on and Bill can cover the part of this as well.
I think we do plan on some growth in next year to meet that 10% number.
I think we have visibility to to the lapse and the losses into when the new business comes on that makes us feel good about that I mean, you know could we have a little bit of volatility you doesn't hit in the September October doesn't hit in July or August type of thing.
I think we have a pretty clear.
Line of sight to some new business that will that will get us there from a top line standpoint, quite frankly things like what we did in our manufacturing plants in the third quarter make me feel better I Didnt think we'd be able to make that kind of a step change in cost.
As early as we did so the cost side continues to to track on or above.
So on are better than what what I would've thought and the topline we feel good about so on a go if you'd like to yeah. I think in terms of the 10% for for next year I think what we've said before and how we think about this is about two third of that that 10% EPS growth will be driven by topline of one to two.
Lastly, in our business model the leverage we get out of our plants when one volume pumps through creates some really strong pool in the middle of the PM now and to Steve's going all the great activities.
We've seen in Q3 will continue to.
The benefit us on the other side you talked about some of the.
Input costs and some of the I'm afraid and those kind of things that have driven on pricing I think we continue to get efficient there, obviously, who knows what the bid environment will bring to us but.
We wake up every day in this business thinking about how to become more effective than more efficient so that we can offset that inflation.
Okay. Thank you.
Your next question comes from Amit Sharma of BMO capital markets.
Hi, good morning, everyone. Good morning.
Steve just wanted to go back to decision on Matthew.
Can you talk about that little bit how should we think about that doesn't mean that most of the heavy lifting in terms apart from the optimization.
And I think in supply chain comment is behind US now and that you are really flexing the organization to you a little bit more focus on topline and that's what what's needed.
Well I would I have to tell you. It sounds like you just read my notes right. So if you think about when when Matthew and again I want to thank Matthew for all of his support.
If you think about one Matthew was was hired I think I would argue this is a very new treehouse right compared to when when Matthew was fired.
If you think about.
All of the accomplishments we talked about.
Our peak consolidations looking the SG nay work we've done.
See you know all of the things that have happened so far the consolidation of organizations. The conversation in our leadership team now is about innovation is about top to top customer relationships is about IBP is about you know the investments that we're going to make in growth not investments in in consolidation and 2020 were talk.
And now we're looking beyond 2020 about investments in growth, we're talking about when the window acquisitions make sense in which ones. So if you think about how different the the conversation is and how different the skill set is a week. We showed you numbers I mean, the underlying core businesses growing nicely.
From an earnings standpoint, we think it will pivot to growth in the fourth quarter. It will certainly be growing in 2020. So.
I think it's a natural evolution of of skill set and things that we need on the on the leadership team having said that you know there are no issues I mean, I I hope that goes on said there are no issues from an accounting standpoint from a disagreement standpoint, the guidance that you're looking at Matthew was was intricately part of and he is available to US we wouldn't have monika.
Tolling agreement going forward, if there were any any issues. So.
We intend to help him as much as we can thank him as much as we can and focus on different set of variables going forward.
Very helpful.
One more on on your.
Customer makes and all of US looking at the III channels right for private label.
But more than half of your business is now in alternate channels.
Are those channels to growing faster than III for your business and.
Are they margin neutral at least as you compare them to margins in Iraq channels.
Oh, Yes, I think the answer would be Jaeson would be yes, I mean, obviously places like Aldi and Lidl those folks are growing very very very quickly trader. Joe's places that are that are very private label centric are nice businesses that are growing quickly and with regard to margins I think.
It just depends on the categories I think the categories performed regardless of IRA or on or not I right. They perform margin sort of neutral.
Our higher margin categories are the same higher margin categories, regardless of whether the channels tractor not the ones that have a lot of capacity, where we need to be more competitive and give the customer better price or the same categories regardless of.
Whether theyre tractor or not.
Alright, thank you so much.
Your next question comes from both top of Suntrust.
Thanks, Good morning, corn belt, good morning, Bill and I'm, sorry, maybe use hit this again, but can you explain to me why the orders were cut.
So late in the quarter, a and then why that carries over into the fourth quarter, because obviously, you're looking for lower potential growth. So I mean was where they are more orders that were cut in October was there something that you know I just help me understand the whole situation one more time.
Okay. No I think we we saw we saw the quarter fall off and you know you can speculate on the whether you can supplement it was four degrees warmer than normal we have a lot of cold weather categories. You can speculate on some of the largest retailers the United States. It was into one of their fiscal quarters. I mean, you can speculate on a lot of things on why why.
By volume and so at the end of September was soft I, we try not to to do that.
The October started off as a normal October I think we have the best visibility I think I mentioned that earlier that we've ever had and we think the number we've guided to an October is the number so I don't know bill if you like to yeah and answer the to the point bill around the mechanics of of how it impacts Q4, so some of that performance.
That you see came through in the in Q3, but obviously some of that got capitalized into inventory and so as that higher cost inventory gets sold off in Q4, we're gonna have a bit of a drag there that weve accounted for the midpoint of our of our of our guidance range.
Yes, it wasn't really the volume that did it was the if.
We call down we had a pretty good look at the.
At the numbers at the coming out of second quarter, and we did that on our second quarter call.
We took that the shading the operations team.
They took as I said earlier the team Austin and lean capacity. They added those things all together and said we have an opportunity to make a step change in our in our operating system and they did that so those are the costs the come through its really not a volume thing we guided to look to our best look at the volume for the quarter. The September orders really are.
Are they affected September they're not affecting the before and to that point, even though we are on track in October yeah.
Yes.
Just to be clear is there's there's no water theres no from the distribution gains that you were expecting in the third and fourth quarter Nothing's changed there. This is just timing.
Of seasonal orders is how your.
Exactly exactly okay, I think some people with a later Thanksgiving probably brought things like refrigerated dough right. We make pie crust, we make some very seasonal categories that are tied to Thanksgiving I think the Thanksgiving being a week later people naturally or you know retailers are driving the same inventory reductions where they nash.
It really push those those shipments back into October versus September .
And then on the beverages side anything new I guess I was trying to understand both weve theres, new dot competitive dynamic on single serve but also I was probably expecting a little bit more from cold brew to in this quarter.
Yeah, the Cobra business, it's interesting.
We do have a large anchor customer that business, probably will ship a little bit in December but more in January than we initially thought we couldn't control that we are shipping product, we're making saleable product and we've got a couple of small customers that are that are in market with that product which is great.
I think we're going to try to do a little sampling event and we'll we'll probably share that with you at our next Investor Conference. So you'll get a chance to look at that.
Yeah, that's probably a little bit of the call down as well the timing of when the the first customer wants to started in January versus in December .
Got it thank you.
Got it.
The next question comes from the second <unk>, yes.
Hi, good morning, So Dave.
I apologize I a little late joining the call. So I hope this is Stuart under another question, but just to clarify the weakness we saw in September and sounds like some pieces maybe come back in October so understand why lower the midpoint of the revenue is that really tied to bill Chappell. His question that a piece that beverage business.
It is coming into January versus December So quick clarification, there and then a bigger picture question just wanted to know Steve.
Now versus call. It the first on your days you read the company has anything changed in terms of how you think about.
No longer term organic sales.
Opportunity for this company seems like the volume trajectory is taking a little bit longer to inflect than you initially expected, but that's just my interpretation.
And then is 10% escrows realistic on a 1% to 2% topline.
Help us understand why shouldn't be a more moderate rate of.
Op expansion. Thank you.
Sure.
I would say on the fourth quarter guidance I, just think we have way better numbers now I would say, yes, the coal Bruce a small piece of it I think we just to understand remember we do this across you know 27 categories or 29 categories being a how you look at it so cobras a small piece of that yes, but the rest of the categories. We just to.
Have a better feel for what the fourth quarter numbers are.
What I'd tell you that the 100 days in if there is one area. The the frustrates me the most it's the pace.
Then I go back and I I prepare the script for this and I look at we just did the Investor day 11 months ago, and I think about what we've accomplished in 11 11 months ago, we were fighting fires and snacks, we were doing a whole bunch of other things we still had all the salesforce as we had all these different things going on so.
And then the ERP systems everything when I think about the amount of progress. We've made in 11 months I think it's amazing.
The topline is taking a little while to go the sales cycle in this business that don't read that does lack of success read it as us just better understanding the sales cycle people make annual into one into your commitments when they when they do labels for somebody all of those things so that that turnover takes a little while.
I think also the lack of our commercial or sort of visibility I.
I think some of the the the Prague things that were in process to leave us a weren't as clear to us at the time.
I think we've lapped that will be lapping that here as we get into the first part of next year.
So yeah. It has taken a little bit more time, but maybe I'll, let bill speaker.
Yes, so the part of the question around the 10% from that for next year, obviously add to Steve's point, we put the tools that strategies in place to deliver the one or 2% clearly there's some work as as indicated in the Q3 results, but our commercial excellence team. That's you know only a few months old they're doing a great job at really identified.
Opportunities, we've been asked to I'm.
To bid on the business that we lost 24 months ago, our services still is still pretty high and we're knee deep obviously right now into our 2020 Aoki process and are planning processes, but we think theres just leverage in this business model and that were little bit of.
Growth on the top end some strong operational efficiencies on the middle by Pn, Alan and I continue relentless focus on cost that may weaken that we have a line of sight on 10%, yeah, and I might that might build on that one way I mentioned the word on new Treehouse.
Earlier, and I think it's relevant here does the new process with IBP. The sales organization is now bringing us a bottoms up plan. If you can think about how fragmented we were and we were that way on purpose. The plans were top down right and weren't grounded in the customer commitments and contracts as much as they will be today.
So we now have a top down plan and a bottoms up plan, we have that natural tension between us pushing them and then them understanding what's realistic. So I think the plans going forward will be much more realistic I.
I don't think you'll see the volatility that you've seen us in the past that doesn't mean, there will be none, but but I think will get better.
You know I I think we made a nice step change and going into 2020 would we see our cost structure. We think we have line of sight to the volume we need and go.
And the math would suggest 10% as very doable.
You just quick clarification on that last point, yeah. If I'm hearing you correctly should we take that to mean that you now have a bottom up forecasting versus top down before and if so when exactly kind of did you did that system go into place where you kind of said sorry, guys were no longer top down we're going bottom up does element.
I'm going to look at the Guy running the IBP process across the table.
Thanks for the for the question on the integrated business planning, if you're familiar with it it's a process as iterative in nature. So several months ago, we execute what we call cycle zero.
Most of our businesses with through two or three cycles and at our corporate level through our second cycle I'm. So it is building and I would just having a lot more smarter than ever process and to allow those pieces. So I think it's its continue to to evolve, but it's really getting stronger and its right. When we needed as we head into 2020, yeah. So I would suggest as Bill said, it's a couple of <unk>.
Unsold, but remember we can do this because we have systems in place because we have customer teams in place now.
It seems like a rudimentary thing that we should have had but we weren't organized to do that kind of.
Detailed planning process before and I think we are today and.
And expected to get better and better.
Your next question today comes from Carla Casella of JP Morgan.
Hi, Good morning, Mr. Clark on for Carla.
Quick question for you. Thanks for the additional color on the RFP cereals sale.
Complete your evaluation of businesses for sale.
I think it does move materially you know obviously, we talk about portfolio optimization is one of our strategic pillars. So you know that will always be looking at at the pieces of it.
You know I think if you do the actual math theres, maybe 40 or $50 million left and what we guided to a year ago. So.
That would suggest.
Odds and ends not nothing material.
Okay got it. Thank you and then you started to touch on this a bit but can you talk more about the trends in spreads you're seeing between branded and private label pricing.
You know it's interesting.
I would say that's one of the things.
Being Oh, a long term brand brand Guy.
I've never seen private label become the the the battleground and I think with the battleground going on between some of the hard discount retailers.
People are now using private label as a front page price point item.
And so I've I've never seen it as aggressive as it is we see some places where our customers investing a great deal in their pricing on private label to make sure there sharp and then they compete against our discount or so.
It's all over the board, it's very regional.
But now that the private labels much more of a strategic tool versus a tactical tool. The customers I think our are really looking at pricing by zone. I think you know as you know west coast groceries very different than east coast grocery.
So, but we see probably those those those spreads growing in many places I would suggest are growing not not contract.
Got it thanks for that color.
Next question comes from Jon Andersen of William Blair.
Hi, good morning, everybody or good morning, Josh.
Steve You mentioned, a 11 months ago at the Investor Day.
A lot like going on obviously.
One of the.
Well my takeaways was that.
Perhaps treehouses.
Net landed cost you know any category, where maybe not as low.
I'd be or as low as some of the smaller more focused competitors.
That you're up against has that to what extent do you think that changed your cost competitiveness in each vertical or category.
During the past 12 months and are you are you seeing.
A better ability to kind of go into bids.
And that will lead you know.
Address retailers kind of value added concerns, but also more price price competitive as well.
Sure No. That's a great question I would suggest a couple of things.
We have gotten more competitive the investments we made and Treehouse 2020 are paying off things like we did this this quarter I mean, those were expensive investments, but they but they do make us much more competitive, but I think even more important to that I think we now because were more more consolidated organization with.
Stand two things, we better understand the role of private label at the retailer. So is it a value added sale or is it a value sale quite frankly, right I mean, do we need to bring them innovation do we need to bring them.
Natural organic clean label or do we need to bring them value. So we better understand what the needs of the retailer our and so we can bring the right formulas right things, we understand our low cost formulas, we understand where we bring value when we bring when where we bring experience.
But we also have a better understanding of what different businesses clear at what does a large bid in each category what should that clear out right. What's the right price point in each for a large medium or small customer in any one of our 30 categories. So I think our our revenue manager.
From an organization and the work that the sales organization is doing.
As better aligned us with both the market and the customer strategy and I think that's why we're starting to win more than we are losing.
Thanks, that's helpful.
One more on the just the changes that you've made.
The third quarter the improvements in manufacturing I, just want to make sure I understand there. So it was kind of a headwind from a cost perspective in the quarter, but it sounds like a tailwind.
With respect to maybe capacity and productivity in the future can you talk a little bit more detail.
Around how that works so what what helps you in the future based on the investments you made in the in the third quarter and when should we begin to see some.
Some of those those are those improvements flow through thanks, very much sure I think it comes down to was as simple as we're producing more product with less shifts.
And if you know if you're able to do that in over the long term. If you can you know if you can get more product off the same physical assets.
With less runtime all of the math works really well and so that's it in probably in a nutshell and I would expect it to starting next year and the reason for that as we expect a little bit of volume pickup in next year. So the more cases, you run through the more that savings you get a but also we talked about our year end focus on inventory and working capital and.
So we won't be running as hard I mean, there's some categories that we run hard every day, because or there are tight and their seasonal but across the entire business, we probably won't be running that hard with the holidays with all of those natural times, it's a great time for us to pull our inventory down get our working capital and our targeted levels. So this.
Business is doing all of that with a very disciplined look at working capital.
And so I think all of those things triangulate.
Into the impact coming into next year.
Great. Thanks, so much.
Your next question today comes from John Baumgartner from Wells Fargo.
Good morning, Thanks for the question for John Hi, John .
Steve I wanted to trying to reconcile your comments because I think on one hand, you're you're mentioning that the customers are investing a lot a lot more private label pricing These days.
Look at pricing net of commodities, which I think was actually positive for the six straight quarter.
I mean, it's kind of highly unusual going back overtime for this business. So I'm curious when we think about pricing net of commodity.
Net positive balances just kind of goldilocks environment, where the cost inflation hasn't really been a lot. The consumer environment has been improving a bit and that balance kind of gets out of whack again when either of those two variables kind of a road or to what extent previous positive Nok being driven by just better internal problem.
Structural changes you've made internally to the business.
You know maybe bill I'll split this one, but but I think you can't discount the amount of money we've invested in in team AOS and how we're getting better yield we're getting so so sometimes arpine OCC isn't you know isn't steady state right, we're improving the operation so much.
We're engineering cost out we're we're we're cutting a yield or improving yield were cutting waste. So sometimes our PNR number one when you're in improvements situation might be a little bit skewed.
I don't want us to think were margining up on the customer in fact, my conversation with the customer as you know we talked about the 300 basis points in the.
In team Austin in 2020, you know, we can take that out of our cost system without asking the customer for a lot more so well bill if you want to.
Sure just to build on Steve's comments I think you know obviously those element of p. not that efficiency, we have a lot of effort around value engineering very professional procurement organization. They really does a lot to drive out the class.
As a percent that's the efficiency driven is growing and that we think thats an opportunity for us to leverage as we go forward.
And it should be given how much money was spent on 20 twond, we have very high expectations, but team because weve resources.
Okay. Thanks for your time, great. Thanks, John .
The Ross' question today as a follow up from Rob Moskow of credit Suisse.
Hi, Thanks for the the follow up.
I'm trying to do a walk from your original guidance for operating income for the year.
It was 293 20 fives and I don't think there's any update provided here.
Do you have a range that you're providing for operating income or not I'm. Good based on what you've said is for fourth quarter. It looks like it's going to be around to 65.
As if they step down and maybe you can help me how much how much of the step down would be from just divesting cereal I guess.
Right.
Do you want to.
We're not updating our EBIT guidance at this time, Rob I'm, just revenue well, let's see if.
Yes, yes, and the ROI there was some moving.
Moving stuff around from the Divesture of cereal.
It will weaken.
Yes, we can work we can work through some that pull out because its end. This disc ops. So we can we can have a pretty good look at what the differences there.
Okay. So we could take a peak at the the operating income contribution of that that business.
Okay all right. Thank you.
Well I know.
Go ahead, yes.
This concludes my question and answer session I would like to turn the conference back over to Steve Oakland for any closing remarks.
Well I know, it's a busy morning for everyone. I know, we've put a lot of information from these today. We appreciate all of your support and all of your time today and look forward to.
See you all soon have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.